RBI’s capital buffer norms good for banks, says Moody’s Credit Outlook

This will compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, feels the rating agency

GN Bureau | February 12, 2015


#reserve bank of india  

Last week’s guidelines on maintaining a countercyclical capital buffer (CCCB) by Reserve Bank of India has been hailed by the global credit rating agency Moody's .

The guidelines are credit positive for Indian banks because they make clear that banks will be required to hold the additional capital amid periods of rapid credit growth, according to an article in Moody's Credit Outlook.

The guidelines maintaining CCCB is not expected to get activated in 2015 but "nevertheless, these guidelines provide the RBI with a tool to compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, which would benefit the banks' credit quality," the Moody's said.

According to Moody's, India's domestic credit/gross domestic product (GDP) ratio has consistently increased over the years.

The level at the end of March 2014 stands at 80.2 percent, which remains within the three percentage point acceptable range of the five year average of 78.2 percent, according to an article in Moody's Credit Outlook.

The guidelines on CCCB act as an additional layer of loss-absorbing capital on top of the banks' increased minimum capital requirements under Basel III.

Basel III gives regulators in individual jurisdictions the discretion to implement a CCCB of up to 2.5 percent of risk weighted assets when they see fit, to offset pro-cyclicality by requiring banks to hold more capital at times when the regulator judges that the macro-financial environment could encourage excessive risk-taking.

According to Moody's, corporate loans, which account for about 80 percent of Indian banks' loan exposure, have negatively affected banks' asset quality owing to high corporate leverage, and the asset quality of loans to households have been relatively stable.

Thus, the RBI has focused its triggers on overall domestic credit and the health of banks and corporates to sustain the increase in credit.

According to the RBI's guidelines, the key trigger for activating the CCCB will be when the credit/GDP ratio has risen relative to its long-term trend.

The RBI said it will require banks to hold the full 2.5 percent buffer when the gap between the credit/GDP ratio and the long-term trend exceeds 15 percentage points.

The central bank will implement a CCCB of less than 2.5 percent when the gap is between three and 15 percentage points, with the size of the required CCCB increasing on a graduated scale.

Although the credit/GDP ratio will be the key trigger, the RBI said it will maintain its discretion when reducing the CCCB, and will also look at other indicators, including banks' ratios of loan to deposits, non-performing assets and interest coverage.
 

Comments

 

Other News

BJP lawmakers top the list in hate speech cases

Out of all MPs and MLAs in office, 58 have declared cases related to hate speech. This includes union minister for drinking water and sanitation Uma Bharti along with 14 other Lok Sabha MPs. The list also includes 8 state ministers. A party wise analysis reveals that BJP has the highest numb

After its withdrawal from Meghalaya and Arunachal, is it time to review AFSPA in other areas too?

After its withdrawal from Meghalaya and Arunachal, is it time to review AFSPA in other areas too?

Togadia, Sinha and anti-Modi prejudices masked by empty rhetoric

There is an uncanny similarity in the pathological opposition to prime minister Narendra Modi by two members of the right wing, Pravin Togadia and Yashwant Sinha. They come from a diverse social and political background; yet they share a common strand that shows an unmitigated hatred towards

“We are becoming American digital colonies”

Data is the new oil; and it needs to be protected. In an interaction with Governance Now, Lionel Baraban, CEO of Famoco, talks about how the French tech firm is developing secure business devices to safeguard data against going to other countries. What are the major roles o

Goa Shipyard and MTU, Germany to manufacture MTU engines in India

Goa Shipyard Ltd (GSL) and MTU, Germany have agreed to cooperate in the  local manufacturing of technologically-advanced MTU series 8000 engines in India. Under the agreement, which was signed at India’s leading defence trade show Defexpo-18, the companies will manufacture the 16-

ONGC employees bag 13 medals at the Gold Coast CWG

ONGC sportspersons outshone other participants in their respective categories in the recently concluded Commonwealth Games in Gold Coast, Australia. ONGCians bagged 13 medals including 5 Gold, 3 Silver and 5 Bronze, contributing to the 66 medal tally of Team India. ONGCians Ragala Venkat Rah

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter